Answered: Suppose Caroline runs a small business…

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter8: Perfect Competition

Section: Chapter Questions

Problem 23RQ: What two lines on a cost curve diagram intersect at the shutdown point?

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Profit maximization using total cost and total revenue curves

Suppose Caroline runs a small business that manufactures shirts. Assume that the market for shirts is a competitive market, and the market price is $20 per shirt.

The following graph shows Caroline's total cost curve.

Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for shirts quantities zero through seven (inclusive) that Caroline produces.

Caroline's profit is maximized when she produces______ shirts. When she does this, the marginal cost of the last shirt she produces is ______, which is (GREATER OR LESS) than the price Caroline receives for each shirt she sells. The marginal cost of producing an additional shirt (that is, one more shirt than would maximize her profit) is _____, which is (GREATER OR LESS) than the price Caroline receives for each shirt she sells. Therefore, Caroline's profit-maximizing quantity corresponds to the intersection of the _______ curves. Because Caroline is a price taker, this last condition can also be written as ___________.

Module Five Quiz
The following graph shows Caroline's total cost curve.
Use the blue points (circle symbol) to plot total revenue and the green points (triangle symbol) to plot profit for shirts quantities zero through seven
(inclusive) that Caroline produces.
200
175
Total Revenue
150
Total Cost
125
Profit
100
-25
ENG
(Sg) 3NN3ARI ONY ISO0 TYLOL

Calculate Caroline's marginal revenue and marginal cost for the first seven shirts she produces, and plot them on the following graph. Use the blue
points (circle symbol) to plot marginal revenue and the orange points (square symbol) to plot marginal cost at each quantity.
35
Marginal Revenue
30
25
Marginal Cost
20
QUANTITY (Shirts)
COSTS AND REVENUE (Dolars per shirt)

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